Final answer:
Insurance allows the transfer of financial risk from individuals or firms to an insurer. Participants pay premiums based on event probabilities, and those affected by the insured event get compensated. The chosen answer is 'Risk' as it is the financial risk that is transferred in insurance.
Step-by-step explanation:
Insurance is fundamentally a method by which risk is transferred from an individual or entity to an insurance company. When households or firms purchase insurance, they make regular payments known as premiums. These premiums are priced based on the probability of certain events occurring within a group. If members of the group experience the insured event, they are compensated from the pooled resources collected via premiums. Insurance serves as a way of sharing the financial impact of risks, distributing the cost among a larger group, while also dealing with the challenge of imperfect information in the market.
The choice from the given options would be Risk, as insurance does not directly transfer the loss, hazard, or peril, but rather the financial risk associated with these.
Insurance and Imperfect Information
Insurance markets deal with the notion of imperfect information and the principle that, over time, what someone pays in premiums should not exceed what they receive in benefits on average. An actuarially fair insurance policy equates the premiums paid with the average payouts to the risk group. However, moral hazard may arise where individuals insured against a risk have less incentive to prevent it, knowing the financial burden will be shared or compensated.